U.S. natural gas futures fell about 5% on Tuesday to a fresh 3-1/2-year low on near-record output, ample amounts of fuel in storage and forecasts for warmer weather and less heating demand next week than previously expected.
Traders also noted that gas flows to U.S. liquefied natural gas (LNG) export plants should remain low so long as a liquefaction unit at Freeport LNG’s facility in Texas stays shut.
The combination of near-record production and mostly warmer-than-usual weather and low heating demand so far this winter, other than an Arctic freeze in mid-January, has allowed utilities to leave more gas in storage.
Analysts forecast inventories were currently about 15% above normal levels for this time of year.
Energy traders said low prices usually encourage power generators to burn more gas instead of coal and prompts producers to cut back on gas drilling.
But even if energy firms reduce gas drilling, gas output will likely still rise because oil prices are high enough to encourage producers to seek more oil in shale basins like the Permian in Texas and New Mexico and Bakken in North Dakota. A lot of associated gas also comes out of the ground with oil in those shale basins.
“Many gas producers are well-hedged and expecting an LNG demand boom beginning next year – and are loathe to cut flowing supplies ahead of the long-awaited opportunity,” analysts at energy consulting firm EBW Analytics Group said in a note.
But EBW noted that “extreme price weakness may force producers’ hands, weakening supply in low-demand shoulder seasons… simply slowing new completions could balance the natural gas market.”
That may already be happening. U.S. producers drilled just 850 oil and gas wells in January, the least since February 2022, and completed just 863, which was also the least since February 2022, according to federal energy data.
Front-month gas futures for March delivery on the New York Mercantile Exchange fell 9 cents, or 5.1%, to $1.678 per million British thermal units at 10:32 a.m. EST (1532 GMT), putting the contract on track for its lowest close since July 2020 for a second day in a row.
That put the contract down about 20% over the past six days of price declines.
SUPPLY AND DEMAND
Financial company LSEG said gas output in the U.S. Lower 48 states rose to an average of 105.8 billion cubic feet per day (bcfd) so far in February, up from 102.1 bcfd in January, but still short of the monthly record high of 106.3 bcfd in December.
Meteorologists projected the weather in the Lower 48 states would turn from warmer than normal now to colder than normal on Saturday and Sunday, Feb. 17-18, before returning to mostly warmer-than-normal from Feb. 19-28.
With seasonally colder weather coming, LSEG forecast U.S. gas demand in the Lower 48, including exports, would rise from 124.0 bcfd this week to 129.0 bcfd next week. The forecast for next week was lower than LSEG’s outlook on Monday.
Gas flows to the seven big U.S. LNG export plants slid to an average of 13.6 bcfd so far in February, down from 13.9 bcfd in January and a monthly record of 14.7 bcfd in December.
Analysts do not expect U.S. LNG feedgas to return to record levels until Freeport LNG is back at full power, which could occur in mid- to late February.
(Reporting by Scott DiSavino; editing by Jonathan Oatis)